The main pragmatic argument for patents is that new inventions – technologies and innovative applications thereof – can have significant positive externalities for others who can learn to utilize them as well, without them having to incur the development costs.

As a result, without patents, the economic incentive to invent is not strong enough to make it profitable for individual people or companies to invest in research and development, even though the efforts might be net value producing for the whole economy.

Patents allow the inventor to capture a bigger share of the value that the invention produces, and this ensures that he gets duly compensated for his efforts. This creates incentive for researchers and developers to strive for new inventions.

However, patents – monopolies on technologies – can have significant negative externalities as well: they restrict others’ freedom. Patents can be used to limit competition by preventing new inventions from entering the market and restricting technological progress by blocking further development of inventions and methods.

Take e.g. the case of the oil industry buying up patents related to renewable energy technologies in order to be able to control their commercialization and rollout, and thereby extend the life cycles of their oil-based technologies and maximize the value of their sunk invest-ments in oil-related infrastructure and discovered reserves.

Patent Wars Reduce Competition

“Patent wars” can cause companies to pick their focus markets and business areas based on the level of IPR protection therein, rather than going after market gaps (Paik & Zhu 2013) – unfilled human needs – which causes inefficient resource allocation and reduces competition where IPR protection is high.

These patent wars involve significant costs, while it can be argued that they produce hardly any net real value for the whole economy. In 2011, Apple and Google spent more on patent lawsuits and patent purchases than on research and development of new products.

Andrew Yglesias (2013) points out that intellectual property in general is more comparable to “land” than “capital” in classical economic models. They are monopolies by definition and non-fungible. Equal substitutes cannot be produced by human labor to compete with a patent, which does not qualify them as “capital” in the Georgist sense. (George 1879.)

And this is very relevant for the consequentialist approach to the questions of what kinds of intellectual property should be patentable and otherwise registrable – and, especially, what the costs of holding such intellectual property should be.

Many economists agree that land value taxation (LVT) would improve land (i.e. location) use efficiency. Similarly, taxing the holding of patents according to their market value seems like a very promising improvement for the intellectual property rights market. 

Patents on a Constant Auction

Such a tax would not prevent the developer of the technology from receiving compensation for his efforts: He could price the patent according the most productive use he sees available for it and a buyer who sees a better use would buy it off him and pay the higher taxes – just like in the case of land under land value taxation.

Instead, the tax would make it much less unprofitable to hold patents for purely protectionist purposes. You would patent things only if you intended to use it productively or sell it for productive use right away. Patents would practically be on a constant auction to the most productive user!

Anyone who incurred bigger externality costs from another’s patent, than the patent holder could produce additional value with the help of that patent, would buy that patent off the owner. This would prevent extortion through such monopolies. Currently, “renewal fees” (EC 2012, p. 4) are the only cost to the holder for maintaining a patent and by no means reflect the negative externalities that the specific patent in question imposes on others by preventing productive use and development of the technology elsewhere.

The market value could be determined according to outstanding, binding purchase offers for the patent.

Obvious Grounds for Taxation

Does the government have a justification for taxing patents? It is hard to find anything with a more obvious right to charge for. Patents would not be possible without governmental agencies granting and enforcing patents by e.g. punishing for breaches. There are hardly any ways to implement intellectual property rights in anarcho-capitalism (see e.g. Kinsella 2008).

There is no reason why the government couldn’t take a large share of the profits made by holding patents – especially when such a tax would increase the efficiency of their use. A 10 % tax of market value would – like in the case of land – mean that the government takes roughly a half to two-thirds of the potential of the patent to generate additional profits.

Land and patents are similar in this sense:

– Both can be acquired and held for protectionist and hostile strategies that limit fair competition and others’ possibilities.

– The risk of others doing so results in agents having to acquire and hold them for "defensive" purposes: preventing others from preventing them using the land or technology. (Kinsella 2008, p. 22)

– The revenue generation potential (and hence market value) of both depends heavily on the development of the whole economy.

The value of land in a city rises as its population grows – with both increased labor productivity (allowing people to afford higher rents) and increased scarcity of land – without any additional investments required from the landowner. (George 1879.)

Large Markets Increase Value

Similarly, the value of a patent grows with the size of the market where the patent can be leveraged – without any additional marketing efforts from the patent holder. Compare developing e.g. diabetes medication or touch-screen technology for a market of 10 000 users or 1 000 000 with a similar distribution of purchasing power.

Also the number of potential producers that could otherwise leverage the technology has an effect. A patent (a monopoly on technology) has no value, if there is no one else who would want to use the technology.

Because much of the value of both land and patents is generated by the whole society and increase simply with the size of the society, it is quite justifiable that part of the income they generate goes to the maintenance of such a society – and especially maintaining the structures that make such ownership possible in the first place: legislation and judicial systems that maintain and enforce patents.

With constantly growing global markets (due to growing populations and living standards), such a loss of margin would not significantly hamper the profitability of R&D activities.

The questions related to IPRs are not easy ones. This text provides no final answer, but aims to bring to the discussion the potential of market value taxation in improving the functioning of patent markets.

Tuure Parkkinen
Bachelor of Science
Aalto University

As a part of the World IP Day celebrations IPR University Center organized an essay competition and Tuure Parkkinen was one of the finalists. The author discusses regarding monopolies and other market imperfections further on his upcoming book "Fixing the Root Bug".

Literature references

EC, 2012, “Towards enhanced patent valorisation for growth and jobs”, The European Commis-sion, Commission Staff Working Document 458 (final), retrieved 17.12.2013,http://ec.europa.eu/enterprise/policies/innovation/files/swd-2012-458_en.pdf

George, Henry, 1879, “Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth – The Remedy”, New York: Double-day, Page, & Co., retrieved 22.7.2013, http://files.libertyfund.org/files/328/George_0777_EBk_v6.0.pdf

Kinsella, N. Stephan, 2008, “Against Intellectual Property,” Ludwig von Mises Institute, retrieved 14.8.2013, http://mises.org/books/against.pdf

Paik, Yongwook & Zhu, Feng, 2013, “The Impact of Patent Wars on Firm Strategy: Ev-idence from the Global Smartphone Market”, Harvard Business School, Working Paper 14-015, cited 20.10.2013 http://www.hbs.edu/faculty/Publication%20Files/14-015_8483575c-1f96-4a34-bcbf-c83d99da8959.pdf

Yglesias, Matthew, "Newfangled Capital", Slate.com, MoneyBox blog, 14th June 2013, cited 17.6.2013, http://www.slate.com/blogs/moneybox/2013/06/14/new_fangled_capital.html